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Iran’s Hyperinflation Economic Death Spiral

My October 2009 Globe Asia column was titled “Iran’s Death Spiral.” In light of the recent events that have transpired in Iran, I think I might have been onto something back in 2009.

Since early September, there has been an accelerated slide in the value of the Iranian rial. This slide has been punctuated by dramatic collapses in the demand for the rial. With each collapse, there has been something akin to a “bank run” on rials — with a sharp rise in the black market (read: free market) IRR/USD exchange rate (see the accompanying chart). Ironically, Iranians are clamoring for U.S. Dollars.

It is worth mentioning that the black-market rate is an unbiased metric. In a land where the signal-to-noise ratio is very low, the black-market rate represents an important piece of objective information. It says a great deal about the state of the Iranian economy and the populace’s expectations.

On 8 September 2012, the black-market IRR/USD exchange rate was 23,040. In the course of just under a month, after two big sell offs, the rate settled at 35,000 on 2 October 2012. That is a 34.2% depreciation in the rial, relative to the greenback. It was at this 35,000 IRR/USD rate that I first calculated the monthly inflation rate implied by the rial’s depreciation. The implied monthly inflation rate was 69.6%. Since the hurdle rate to qualify for hyperinflation is 50% per month, Iran registered what appears to be the start of the world’s 58th hyperinflation episode.